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Euro edges higher as inflation improves

H.S. Borji
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Euro edges higher as inflation improves

The euro edged higher against its US counterpart Wednesday amid stronger than forecast inflation data, but the gains were contained as the Federal Open Market Committee rate decision looms over the horizon.

The EURUSD advanced 0.07 percent to 1.2966, easing off an intraday high of 1.2981. The pair, which has declined 3.2 percent over the past month, faces initial support at 1.2923 and resistance at 1.2997.

In economic data, Eurozone inflation was revised upward in August, the European Commission reported today. Eurozone consumer prices advanced 0.4 percent annually in August. A preliminary report released August 29 said consumer price growth had fallen to a five-year low of 0.3 percent.

So-called core inflation, which strips away volatile elements such as food and energy, increased at an annual rate of 0.9 percent.

Meanwhile, US consumer inflation declined in August for the first time since April 2013, the Labor Department reported today. Consumer prices declined 0.2 percent in August, which translated into an annual gain of 1.7 percent. Economists forecast an annual increase of 1.9 percent.

Core inflation was flat in August. Compared to year-ago levels, core prices were up 1.7 percent, official data showed.

Softer inflation is unlikely to deter the Federal Reserve from tapering bond purchases for the seventh consecutive month. The Fed is expected to reduce the pace of monthly bond buying to $15 billion from $25 billion, leading to the program’s discontinuation next month.

The Fed will issue its rate statement later this afternoon, along with a summary of economic projections from central bank policymakers.

The euro has been under pressure all month following a surprise rate decision from the European Central Bank. The ECB cut its target for the overnight rate to 0.05 percent from 0.15 percent at the September policy meetings, and announced plans to begin purchasing up to €500 billion in asset backed securities.

Stubbornly low inflation and an uncertain economic climate are likely to keep monetary policy accommodative for some time, as the ECB looks to navigate the 18-nation currency bloc toward stability. The Eurozone economy stagnated in the second quarter, as Italy slipped back into recession and Germany contracted for the first time since 2013.

The latest blow to Eurozone GDP is likely a result of the escalating sanctions war between Russia and the West. Germany, the Eurozone’s star economy, is already feeling the weight of Russia’s counter-sanctions, as German businesses have already announced plans to scale back investment.

Earlier this week the United States and its European allies announced a fresh wave of sanctions against Russia that target the country’s financial, energy and defense sectors.

The growing rift between Russia and the West will continue to pressure the Eurozone, and squeeze what little momentum the 18-nation currency bloc had at the start of the year. The Ukraine conflict and the resulting spillover has had a significant impact on German confidence.

The Centre for European Economic and Social Research (ZEW) reported on Tuesday that German investor sentiment declined in September for the ninth consecutive time, falling to a 21-month low.

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